Where there’s smoke, there’s bound to be fire, and yesterday’s leaked warning shots across Jerry Yang’s bow resulted in a letter today from Steve Ballmer to Yahoo!, saying in effect: take the offer we have on the table, or we come and get you via proxy in three weeks for a much lower price. From the Microsoft press release:

Given these developments, we believe now is the time for our respective companies to authorize teams to sit down and negotiate a definitive agreement on a combination of our companies that will deliver superior value to our respective shareholders, creating a more efficient and competitive company that will provide greater value and service to our customers. If we have not concluded an agreement within the next three weeks, we will be compelled to take our case directly to your shareholders, including the initiation of a proxy contest to elect an alternative slate of directors for the Yahoo! board. The substantial premium reflected in our initial proposal anticipated a friendly transaction with you. If we are forced to take an offer directly to your shareholders, that action will have an undesirable impact on the value of your company from our perspective which will be reflected in the terms of our proposal.

Ballmer lays out some pretty compelling reasons for Yahoo! to act quickly, and it really looks like their backs are up against the wall. Interesting that the letter comes on Saturday, giving Yahoo! a little time before all hell breaks loose in the markets on Monday. Man this is getting fun :).